All change for India as Modi crashes to defeat

What a difference a week makes in politics. While many are still not discounting the future of Indian Prime Minister Modi, his star has begun to wane.

His nationalist Hindu nationalist Bharatiya Janata Party (BJP) crashed to electoral defeat in five Indian states. The losses set up a possibility that once seemed remote that disgruntled Indian, mostly rural voters may throw Mr. Modi out of office this spring.

This will have far-reaching implications to India’s foreign policies especially the rapprochement with the US and cozing up to Israel at the expense of India’s long seated support for the Palestinian cause.

The gainers were the so-called traditional Indian political family of the left-of-centre Congress Party, led by a Ghandi family scion, and is suddenly looking like a plausible contender for national power.

In three crucial states in the populous Hindi heartland – Chhattisgarh, Madhya Pradesh and Rajasthan – Congress governments will replace BJP incumbents. Regional parties came out on top in two other states, Telangana in the south and Mizoram in the northeast and the race is on for strategic alliances to block the BJP.

But next year’s election is still too far away and anything could happen and it’s too early to write off Mr. Modi’s prospects as he still remains a popular figure and powerful orator, and learning from the mistakes of other Indian political parties, his party is India’s best-funded and best-organized.

Modi decided to embark on a rather bizarre experiment in financial engineering when he made the decision to invalidate nearly 90 percent of India’s currency by value, which hurt many small businesses

Dr. Mohamed Ramady

Charm offensive

So where it did go wrong for a more zealous Hindu prime minister who seemed to charm his way internationally?

One reason is in the economic policies Mr Modi adopted, or fondly called Modinomics, as his tax-and-spend model of development has seemingly failed to deliver to his core support base and the state election results brutally illustrated this discontent in the Hindi heartland, a region that in 2014 gave the BJP two-thirds of its parliamentary seats.

When Mr. Modi was elected he made many promises to woo both domestic and international businesses and investors with catchy slogans invigorating the Indian economy by providing “maximum governance” with “minimum government” and replacing red tape with a red carpet for business, especially FDI friendly business.

But his bold statements were not followed with deep rooted action and instead he became politically more cautious and instead he chose to delay politically contentious reforms that would have allowed market forces to play a larger role in India’s inefficient and bureaucracy ridden economy.

Populist slogans and appealing to the masses was much easier than clashing head on with established business tycoons and entrenched civil servant inertia rather than selling money-losing state-owned companies, making it easier for businesses to hire and fire workers, or privatizing inefficient government banks affected by lending cronyism.

That is not to say that he did not change for better the lives of some of the poorest segments of Indian society and social outcasts and he often listed what he perceived as some of his greatest achievements to deliver to the poor, like opening more than 330 million bank accounts, providing new cooking-gas connections to 120 million households, and installing 90 million toilets.

Fickle voters

But voters are fickle as many politicians are finding out today to their cost, whether Angela Merkel in Germany or President Trump in the US in the recent American mid-term elections, and Indian voters were not overly impressed with all the goodies that Mr Modi had provided, whether these were better roads built or more affordable houses and better toilets, or providing isolated villages with electricity, cooking gas and internet connections.

Creating jobs and boosting citizen’s incomes were his Achilles heel and Mr Modi fell short on these promises. India is still an agriculture based economy despite impressive manufacturing capacity and advanced technology sectors and the BJP’s election chances was affected as crop prices have risen slowly over the past four years in a part of the country that depends on agriculture, and unlike neighbouring China, few nonfarm jobs have materialized.

To add to his woes and create more political and business enemies among the elite, Mr Modi decided to embark on a rather bizarre experiment in financial engineering when he made the decision two years ago to invalidate nearly 90 percent of India’s currency by value, which hurt many small businesses who dealt with cash.

The measure hit construction especially hard, hurting large numbers of migrant workers. An overly complex national goods-and-services tax introduced last year punished small businesses unused to onerous filing requirements.

The Indian rich became more alarmed at these populist measures and some voted with their feet and capital flight if they could. Earlier this year, Morgan Stanley reported that nearly 23,000 US-dollar millionaires have left India since 2014. This is a skill and capital loss that India can ill afford as businessmen, not bureaucrats, will create the job opportunities voters want to see.

Mr Modi has also deemed it politically risk free to try and curb the independence of the Indian Central Bank, when the tension between the Central Bank Governor and the Government boiled over when the Reserve Bank of India’s – as the Indian Central Bank is known – Governor Urjit Patel resigned from his position.

Patel cited “personal reasons” for his departure, but most observers interpreted it as a protest against government attempts to railroad the central bank into following irresponsible fiscal and monetary policies. Modi probably sighed with relief as the new governor, a former bureaucrat known for close links to the Modi government, may allow politicians to fund pre-election spending by raiding the bank’s rupee reserves putting pressure on the Indian currency in the international markets.

He may also allow weak state-owned banks to relaxing their lending rules, and support interest-rate cuts more readily than his predecessor, a respected technocrat with a reputation as an inflation hawk. These developments in India are being mirrored in the US where President Trump is taking pot shots at the US’s Federal Reserve Chairman Powell for raising or planning to raise US interest rates.

Domestic economic woes

India’s domestic economic woes, especially new job creation, are also being affected by international competition and developments in neighbouring countries, especially China.

The open trade and multilateral economic system that India favours is under threat from many quarters such as the rise of robotics, combined with a souring toward free trade in developed economies such as the US, making it hard for India to emulate China by rapidly moving millions of workers from unproductive farm work to better-paid factory jobs.

This requires India to open up more and liberalize its state sector and few observers believe that whoever is in power in India will seriously tackle head on these ingrained issues.

It is notable that, for all the mudslinging and political accusations against each other in the latest Indian state elections, the opposition Congress Party shares Mr. Modi’s populist bent, with the Congress Party making extravagant promises of welfare for the unemployed and loan waivers for farmers, making possible their election successes but also laying the seed for more discontent given raised voter expectations.

The same applies to all governments that make the same populist promises only to be punished at the next round of local or national elections. Mr Modi might be politically wounded but not totally defeated and the old magician might still have a few populist tricks up his sleeve, but as India gears up for its national election, the BJP’s defeats have thrown the race open.

For the wider Middle East, the final outcome is not a small matter but could have significant foreign policy realignment implications especially if the more traditionally pro-Palestinian Congress Party comes to power, but irrespective of who wins, the present economic ties with India, especially in the energy and petrochemical sectors will only increase as these are some of the higher value industries that India needs to create jobs._________________________________Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co author of ‘OPEC in a Post- Shale world – where to next?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.